To Position As Alternative Auto Hub
MANILA, Philippines — A generous use of fiscal incentives is an effective government intervention if it really wants to attract huge investments, develop the competitiveness of the sluggish domestic automotive manufacturing sector and position the country as an alternative auto hub in the region, a new auto industry study said.
This is part of the recommendations contained in the 92-page study “Invigorating Philippine Automotive Manufacturing: A Policy Proposal” conducted by the University of Asia & the Pacific (UA&P).
“There is space for a modern industrial policy that calls for generous use of fiscal incentives especially in encouraging new areas of manufacturing activities. Given the strategic importance of automotive manufacturing and the huge investments involved, it could warrant a temporary intervention from government to place Philippine manufacturing on a level playing field in regional markets,” the recently-concluded study said.
“If government supports automotive manufacturing with the necessary fiscal incentives to match the emerging seamless market, then this could generate multiple benefits of increased tax revenues and increased employment and income levels,” the study said.
According to the study, a generous use of tax incentives is necessary to surmount the challenges of a small domestic market (record high of only 170,000 units in 2010) and weak supply base.
The study also took note of the expected market expansion by 2015 not just for the Philippines but for ASEAN region and its regional trade partner such as the ASEAN-Australia/New Zealand.
With the expected market expansion, the study said, the existing manufacturing capacities of assembly plants in ASEAN would soon reach full capacities.
“This should set the stage for the Philippines to effectively position itself as the second automotive manufacturing hub in ASEAN,” the study added.
The study cited the Asean Economic Community (AEC) by 2015 where the 10 ASEAN-member countries are expected to become borderless and tariff-free and creating a huge demand for locally assembled vehicles and making the entire region as one single market.
By considering ASEAN as a commonly shared market, the study said, domestic trade can be carried out within the Philippine territory as with ASEAN member economies. This is in addition to the growth of the domestic market which will almost double in four years.
The other recommendation of the study calls for the creation of automotive categories to give automotive manufacturers operating globally a choice on how to manifest their global commercial presence in the country.
Already, the study has put forward four new activities under a regional market growth-seeking blueprint that can be considered as eligible for fiscal incentives. These are: activities related to the establishment of local operations destined as a regional manufacturing base for an existing or new automotive model; activities related to the establishment of local operations to enable the manufacture and assembly of CBU alternate energy-saving or hybrid vehicle models; activities related to the establishment of local operations leading to the manufacture and/or assembly of newly designed vehicles for passenger use; and activities related to the manufacture and assembly of parts and components for any one of the above mentioned activities.
For the regional vehicle category, this should include models that may initially be designed for the global market but need a regional market as platform for further development and vehicles manufactured for the regional market because of the unique features of the model and or its intended regional market.
The UA & P, which was commissioned by the private automotive sector, has recommended the granting of export credits as a form of incentive for this vehicle Category 1.
Assuming an export credit of $700 to compensate for transport, logistics costs and pre-economies of scale handicap for potential CBU exports to the ASEAN region, the study said, the government stands to benefit from the total tax collection from the industry. Based on the study, the benefit to cost ratio is $1.82. This means that every $1 of export credit granted to regional vehicle manufacturers there will be a stream of benefits totaling $1.82.
On the alternative vehicle or Category 2, incentives can be in the form of an income tax holiday. The benefit to cost ratio for this incentive is 1.023. This means that every P1 tax incentive given to alternative vehicle manufacturers generate benefits worth P1.023.
For the next generation multi-purpose vehicle category (Category 3), incentives could be in the form of an income tax holiday where the benefit to cost ratio is 1.032. This means that for every P1 tax incentive given to multi-purpose vehicle manufacturers amount to benefits totaling P1.032. The benefits will increase as participating firms increase their production, thereby enabling more opportunities for local content.
For Category 4 or the manufacture and assembly of parts and components for any of the above 3 categories, no cost-benefit estimates were made considering the heterogeneous nature of the parts and components comprising a motor vehicle. Since this category is in support of the three categories, the study said that providing incentives to this category would also generate similar beneficial effects.
The study noted that domestic parts sector accounts for only 10 to 15 percent of the total number of parts needed by local assemblers.
For parts and components manufacturers in economic zones, fiscal and non-fiscal incentives can be given to increase local value-added by sourcing more of their manufacturing inputs from local suppliers, the study added.
Incentives are necessary to make up for the high cost of assembly in the country. The study said that imported raw materials account for 61 percent of total production cost in the Philippines compared to only 23 percent in Thailand. And because of many of Thai supplies are locally sourced and it caters to its domestic and foreign markets, the price difference between the two countries ranges from $1,000 to $2,000.
“Solid incentives support from the government will make it possible for locally-registered automotive manufacturers to be economically competitive,” the study said.
With incentives, manufacturers can sustain buying from local parts makers and at the same time increase local sourcing of strategic components and improve competitiveness on the export of completely built-up units.
With the government’s policy to raise more revenues and its perceived policy against incentives granting, the incentive policy recommendation may not appeal to the government.
To which the study has said, “it would require a change in the mindset of policy-making as well as the dynamic use of existing as well as other enhancements to generate the needed scale that will go hand in hand with the increase in market size like preferential tax for locally manufactured vehicles.”
The recommendation will require a forward looking and much broader interpretation of the heretofore application of the fiscal incentives for investments destined for the domestic market, the study added.
“The way forward is legally feasible, manageable in its implementation and affordable to government. There is everything to gain and little to lose,” the study noted.
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By: Bernie Cahiles-Magkilat
Source: Manila Bulletin, Nov. 20, 2011
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